Should we gift appreciated assets to our children to help pay for college?
As is normally the case with planning, it depends. You first need to determine if you will qualify for any need-based financial aid. The formula for determining need-based aid is
Cost of Attendance – Expected Family Contribution (EFC) = Financial Need.
If a student’s EFC is less than a college’s cost of attendance, then the student qualifies for need-based financial aid. A student’s EFC is calculated using the family financial information provided on the Free Application for Federal Student Aid (FAFSA) and CSS Profile. Gifting assets to your children will increase their EFC, which will lower the amount of need-based aid they are eligible for.
If you are confident that you will qualify for need-based financial aid, then you will want to be careful when assets are gifted to your children. Based on the new “Prior-Prior” rules, gifts to a student should usually be made in their junior and senior years of college. You will also want to be certain not to exceed the annual gift tax exclusion, $15,000 in 2018.
But what if you determine that your child will not qualify for any financial need? In that case, gifting appreciated assets can be an excellent “late-stage” college planning strategy. Not only can gifts help pay for college, but the capital gains tax can be mitigated or eliminated all-together under certain circumstances.
The caveat to this strategy is the “kiddie tax” where unearned income over $2,100 is assessed at trust tax rates. This applies to full-time students under the age of 24. Some scenarios where the kiddie tax would not apply include
- The student can pass the “support test” through “earned income”
- The student is married or over the age of 23
- The student is going to school part-time
Gifting appreciated assets is just one of many tax strategies you can utilize when developing your late-stage college plan. Be proactive and start planning today.